Indian Bank Vs CIT (Calcutta High Court)
Summary: The Calcutta High Court, in Indian Bank Vs Commissioner of Income Tax-II, Kolkata, considered an appeal filed by the assessee under Section 260A of the Income-tax Act, 1961, challenging the ITAT Kolkata Bench’s order dated 30 September 2009 for Assessment Year 2003-04. The appeal involved four substantial questions of law concerning deduction for provisions against bad and doubtful debts under Section 36(1)(viia)(a), retrospective application of Section 14A and Rule 8D, and adjustments to book profits under Section 115JB. The first question related to the Tribunal’s rejection of the bank’s additional deduction of ₹140,33,70,000 under the first proviso to Section 36(1)(viia)(a), on the reasoning that the proviso offered an alternative deduction and could not be invoked where deduction had already been allowed under the main provision. The assessee disputed this interpretation, contending that the proviso conferred a distinct statutory option that should not be rendered ineffective merely because deduction was claimed under the principal clause.
The High Court examined the earlier decision of the Madras High Court in Commissioner of Income Tax, Chennai Vs Tamilnadu Industrial Investment Corporation Limited, reported in (2019) 112 Taxmann.com 386 (Mad.), which considered the corresponding proviso applicable to public financial institutions and other specified financial corporations. That decision explained the significance of the expression “at its option” and held that the proviso carved out an exception to the principal statutory provision. The Calcutta High Court observed that the essential distinction was that the earlier case concerned sub-clause (c), whereas Indian Bank’s claim arose under sub-clause (a), which had been given effect from Assessment Year 2000-01. The Court noted that the Revenue’s special leave petition against the Madras High Court decision had been dismissed by the Supreme Court, as reported in (2019) 112 Taxmann.com 387 (SC). Following the reasoning adopted in that case, the High Court answered the first substantial question of law in favour of Indian Bank. The decision therefore rejected the proposition that claiming the deduction under the main provision necessarily excluded the additional deduction available under the first proviso.
The second and third questions concerned the applicability of the amendments to Section 14A and Rule 8D of the Income-tax Rules, 1962, to Assessment Year 2003-04. The Tribunal had treated the relevant provisions as procedural and retrospective and directed the Assessing Officer to determine the disallowance under Rule 8D without recording a finding that the assessee’s claim regarding expenditure attributable to tax-free interest income was incorrect. Relying on its earlier decision in PCIT Vs Dhansar Engineering Co. (P) Ltd., reported in (2022) 135 Taxmann.com 167 (Cal.), the High Court held that the Rule 8D procedure was prospective and could not be applied retrospectively to the assessment year under consideration. Accordingly, both questions were answered in the assessee’s favour, with a direction to the Assessing Officer to recompute the disallowance in accordance with the applicable legal principle. The fourth question concerned additions to book profits under Section 115JB in respect of provisions for bad and doubtful debts, standard assets, diminution in investment value, fraud and forgery, stationery wastage and tangible assets. The High Court considered this issue factual and noted that the matter had already been remanded to the Assessing Officer for fresh consideration. It therefore declined to answer the fourth substantial question of law. The appeal was consequently allowed to the extent indicated, granting relief on the Section 36(1)(viia) and Section 14A/Rule 8D issues while leaving the Section 115JB question unanswered.
Cases Discussed
- Commissioner of Income Tax, Chennai Vs Tamilnadu Industrial Investment Corporation Limited (Madras High Court); (2019) 112 Taxmann.com 386 (Mad.) — Followed for the interpretation of the words “at its option” in the proviso to Section 36(1)(viia), which was held to carve out an exception rather than merely duplicate the deduction under the principal provision.
- Commissioner of Income Tax Vs Tamilnadu Industrial Investment Corporation Limited (Supreme Court); (2019) 112 Taxmann.com 387 (SC) — The Supreme Court dismissed the Revenue’s special leave petition against the Madras High Court decision concerning the deduction under Section 36(1)(viia).
- PCIT Vs Dhansar Engineering Co. (P) Ltd. (Calcutta High Court); (2022) 135 Taxmann.com 167 (Cal.) — Followed for the proposition that Rule 8D operates prospectively and does not govern the computation of disallowance under Section 14A for AY 2003-04.
FULL TEXT OF THE ORDER OF CALCUTTA HIGH COURT
This appeal filed by the assessee under Section 260A of the Income Tax Act (the Act) is directed against the order dated September 30, 2009 passed by the Income Tax Appellate Tribunal “B” Bench, Kolkata in ITA NO.2486/Kol/2007 for the assessment year 2003-2004.
The appeal was admitted on 18.03.2011 on the following substantial questions of law:-
“1. Whether the Tribunal below, while interpreting section 36(1)(viia)(a) of the Income-tax Act, 1961, committed substantial error of law in holding that deduction under the first proviso was alternative to that under sub-clause (a) and that no deduction under the first proviso was allowable if deduction had been allowed under sub-clause (a) thereby rejecting the appellant’s claim for deduction of Rs.140,33,70,000/- under the first proviso ?
2. Whether the Tribunal below committed substantial error of law in holding that the proviso of sub-sections (2) and (3) inserted in Section 14A of the Income Tax Act, 1961 with effect from April 1,2007 and Rule 8D inserted in the Income Tax Rules 1962 on March 24, 2008 was procedural and retrospective and were applicable for the assessment year 2003-2004?
3. Whether the Tribunal below committed substantial error of law in directing the Assessing Officer to decide disallowance under section 14A of the Income-tax Act as per Rules 8D of the Income-tax Rules 1962 without arriving at any finding that the claims of the appellant as regards expenditure incurred in relation to tax free interest income was not correct ?
4. Whether the Tribunal below committed substantial error of law in holding that only provision for ascertained liability/expense was not to be added back in computation of book profit under section 115JB and that the deduction in the appellant’s case in respect of provisions for bad and doubtful debts, standard assets, depreciation of investment, fraud and forgery, stationery wastage and tangible assets could not be allowed unless the same were for ascertained liability/expense ?
We have heard Mr. C. Bhaskaran, learned counsel assisted by Ms. Swapna Das, learned advocate for the appellant/assessee and Mr. Aryak Dutt, learned standing counsel for the respondent/revenue.
The first substantial question of law is whether the Tribunal was right in holding that the deduction under the first proviso to Section 36(1)(viia)(a) was alternative to that under sub-clause (a) and that no deduction under the first proviso was allowable if the deduction had been allowed under sub-clause (a). Identical issue was considered in the case of Commissioner of Income Tax, Chennai vs. Tamilnadu Industrial Investment Corporation Limited reported in (2019)112 Taxmann.com 386 (Mad.). The only distinction in the said case was that the respondent assessee in the said case was Public Financial Institution to which sub-clause (c) under the said provision would stand attracted. The question of applying sub-clause(3) in Section 36(1)(viia)(a) does not arise and the proviso cannot be read independently was rejected for the reason that the proviso to sub-clause (c) in Section 36(1)(viia)(a) uses the words “at its option”. The proviso provided that a Public Financial Institution or a State Financial Corporation or a State Industrial Investment Corporation referred to in sub-clause (c) of Section 36(1)(viia)(a) shall, at its option, be allowed to in any of the two consecutive assessment years commencing on or after 1st April, 2003 and ending before 1st April, 2005, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, of an amount exceeding 10% of such assets shows in the books of account of such institution or corporation, as the case may be, on the last day of the previous year. Thus, the Court held that the proviso carves out an exception from the stipulation in sub-clause(c), otherwise the use of the expression “at its option” would lose its significance. The said decision would squarely apply to the case on hand and the only distinction being sub-clause(a) of Section 36(1)(viia)(a) would stand attracted in the case on hand and the said provision was given effect to from the assessment year 2000-01. The decision in the case of Tamilnadu Industrial Investment Corporation Limited was challenged by the revenue before the Hon’ble Supreme Court and the Special Leave Petition was dismissed as reported in (2019) 112 Taxmann.com 387 (SC).
Thus, following the above decision, the substantial question of law no.1 is answered in favour of the assessee.
So far as the substantial questions of law nos.2 and 3 are concerned, they could be clubbed together and those questions were considered by this Court in the case of PCIT vs. Dhansar Engineering Co. (P) Ltd. reported in (2022) 135 Taxmann.com 167(Cal.). In the light of the said decision, the procedure under Rule 8D of the Income Tax Rules, 1962 was held to be prospective in operation and not retrospective. Thus, the substantial questions of law nos.2 and 3 are answered in favour of the appellant/assessee and the Assessing Officer is directed to do the re-computation bearing in mind the above legal principle.
So far as the substantial question of law no.4 is concerned, we are of the view that it is entirely factual and moreover the matter is remanded back to the Assessing Officer for a fresh decision in the matter and, therefore, the substantial question of law no.4 need not be answered in this appeal.
In the result, the appeal (ITA/70/2011) is allowed to the extent indicated leaving the substantial question of law no.4 unanswered on the above reason.
